SPS Commerce, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. SPS provides cloud-based, subscription software and supply-chain management services. Dollar amounts below are in millions except per-share data and customer metrics.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $23.752 | $16.534 | +43.7% |
| Gross profit / margin | $16.686 / 70.3% | $12.086 / 73.1% | Margin down 2.8 points |
| Operating income / margin | $0.194 / 0.8% | $0.459 / 2.8% | Down 57.7% |
| Net income / diluted EPS | $0.199 / $0.01 | $0.256 / $0.02 | Net income down 22.3% |
| Adjusted EBITDA (non-GAAP) | $2.922 | $1.858 | Up 57.3% |
| Non-GAAP diluted EPS | $0.12 | $0.09 | Up from prior period |
| Operating cash flow | $6.549 | $1.604 | Increased |
Revenue growth reflected a 12% increase in recurring-revenue customers to 18,398 and a 31% increase in annualized average recurring revenue per customer to $4,634. Recurring-customer revenue represented 89% of total revenue, versus 87%. Management reported this as the 49th consecutive quarter of revenue growth.
Cost of revenue rose 58.9%, faster than sales, primarily due to higher headcount, depreciation and occupancy costs; gross margin consequently contracted. Operating expenses increased 41.8%, including a substantial rise in intangible amortization following the 2012 Edifice acquisition. Despite strong revenue growth, operating income and GAAP net income declined.
Cash, liquidity and capital
- Cash and cash equivalents were $72.559 at March 31, 2013, up from $66.050 at December 31, 2012. Working capital was $80.0, compared with $77.0 at year-end.
- Operating activities provided $6.549; investing activities used $1.089, entirely for property and equipment; financing activities provided $1.049, principally from stock-option exercises.
- The company had no debt outstanding and had a $20 million revolving credit facility maturing September 30, 2016. It reported compliance with facility covenants.
- Management said cash and operating cash flows should cover working-capital and capital-expenditure needs for at least the next 12 months. No off-balance-sheet arrangements were reported.
Outlook, commentary and risks
- No quantified revenue, earnings or other formal guidance is provided. Management expects recurring customers and revenue per customer to continue increasing, and anticipates absolute increases in cost of revenue and operating expenses as the business expands.
- Stated growth priorities include deeper market penetration, more solutions and customer adoption, expanded distribution and international presence, and selective acquisitions.
- Q1 included a $117,000 discrete tax benefit related to the retroactive federal R&D credit; the company recorded a total income-tax benefit of $66,000, compared with tax expense of $153,000 a year earlier.
- Stock-based compensation was $0.924 million, up from $0.612 million. Unrecognized compensation expense was approximately $9.9 million, expected to be recognized over a weighted-average 3.2 years.
- The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and no material changes in internal control over financial reporting. Management identified no material foreign-exchange exposure or material effect from inflation during the quarter.
Important facts for investors to verify
- Whether strong customer and recurring-revenue growth can continue, and whether growth in revenue per customer is sustainable.
- Whether gross-margin pressure and operating-cost growth moderate, given that expenses rose faster than revenue and GAAP operating income declined.
- How much of the quarter’s operating cash-flow increase is repeatable; it included a large favorable change in prepaid expenses and other current assets.
- The ongoing effects of the Edifice acquisition, including amortization expense and contribution from acquired customers.
- The impact of stock-based compensation, share issuance and dilution, and the timing of the disclosed unrecognized compensation expense.
- Potential changes in capital needs or liquidity if planned expansion and selective acquisitions require additional investment.